OCPI

[Scorpion Man]

OK, guys. I have never talked about any of my buy decisions in this forum (although I disclosed CHTR as my largest holding in that thread). I own a name that I think is interesting and not too multivariate in terms of analysis, so I am going to briefly explain it here. Also, to the extent there are M&A banker/lawyer types someone on the board might be able to shed some light on some technical aspects of this trade that I have not yet researched. Some of the numbers (not per share, but dollar) I am posting are from memory and will be off a bit because I don't want to research this before posting. Precision does not matter to the analysis here.

I have bought a reasonably sized position in OCPI over the last couple weeks (half the size of my "best idea"). Average cost a hair under $1.50 per share. I have followed OPLK for quite a while. They have on the order of $200m in cash and investments and have been looking for a deal for years in the optical components space. OCPI is a piece of dog doo company that has been on their radar screen. OCPI has a 58% shareholder, Furakawa, who was sick of owning this and perhaps facing some conflict of interest issues as a major supplier to OCPI.

OPLK announced they had an agreement to buy Furakawa's stake a couple weeks ago - price = $1.50. They simultaneously offered to the board to buy the rest of the company at the same price in cash (the Furakawa deal was like 20% stock in order to keep them interested in OPLK).

OCPI board then put in a 30 day poison pill. OPLK is suing (I figure they won't win but I have no idea). Meanwhile OCPI just put up a horrible quarter that made their previous horrible quarters look just kinda horrible.

OCPI has a ton of cash (they are burning cash- have guided to $95-100m plus they are selling a building and expecting $20-25m). I assume they have NOLs but I haven't looked. They have de minimis liabilites...hard book is around $1.50 and my understanding is its understated (both the equipment and the real estate). I think liquidiation is probably around $1.65 or something (that is a theoretical -- I am not taking into account the real costs of liquidating a company -- but it is very germane to the value to OPLK).

Every $0.10 OPLK increases its bid is $5m in additional considering (Furakawa price is fixed). So OPLK can pay a premium for very little actual dollars. Much of what they are buying is cash. Owning 58% of a company with this much cash and a number of practices (paying board members way too much, for starters) that you don't like really sucks. OPLK has to be very motivated to buy the whole company. THey have to pass HartScott Rodino to close Furakawa, which I doubt is an issue.

About 1/3 of the remaining shares are held by three former founders who left the company at the end of 2006. They have been consistent sellers - the old CEO sold at $2 in December 2006. I believe they are happy to sell to OPLK at a reasonable price (although I have no way of knowing). My instinct is that the poison pill will not an ongoing issue (This is the part where a banker might help). I just don't understand how, if OPLK tenders for the rest of the company at $1.75 and announces the old mgmt team has agreed to tender that this deal won't go through. OTher shareholders will follow because the company has been a disaster. I certainly will.

That's it. I think there is a 85% chance the stock is bought out at $1.65-$1.80 (if I had to pick a price I would say $1.75). There is a 15% chance it gets messy and even then I don't think stock goes much below $1.35 which is the recent low it only touched.

It's a no brainer risk/reward in my opinion. The only thing I haven't figured out because it wasn't my specialty is what the threshhold is for OPLK in terms of being able to control the thing and force a merger -- anyone know? I think its over 90% but I can't remember.

That's it. TYPICAL THIS IS NOT A RECOMMENDATION DISCLAIMER. IT DOES ME NO GOOD TO HAVE ANYONE BUY THIS. IT WILL EITHER GO UP OR DOWN ON THE MERGER OR NON MERGER NEWS. I AM SURE THIS WILL LOSE MONEY SINCE NO GOOD DEED GOES UNPUNISHED AND THIS IS MY FIRST POST LIKE THIS.

SM

[Sniper]

SM,

The board action only delays the sale till after June 2nd, what makes you believe they will increase their offer from 1.50?

Once they have Farukawa's 58.2% (plus whatever else they had), they have controlling interest, why would they be in any rush to buy up the rest at a premium?

[Scorpion Man]

I assume board can easily extend the 30 day poison pill. as I mentioned, owning 58 percent of a cash rich company with crappy board and mgmt is eway less attractive than owning 100 percent. you can't easily make decisions and move money around. you also have two million or more in unnecessary public company costs. I forgot to mention that eliminating those costs and present valuing the savings pays for any premium here. the question is who is more motivated and who has more to gain. that's oplk IMO. shareholders have no reason not to ask for a better deal given that stock is cheap and the simple reason that oplk can and will pay it. deals rarely get done at a price like this...the stock hasspent very little time below 1,50 and lots of time lots higher. that matters. this deal will not be done at 1.50. I will lay you odds on real money. it is more likey not to be done at all.

[AvivaSimplex]

Interesting. Just to be more precise about the numbers, in their most recent 10Q they report cash and marketable securities around $1.05 per share, and $0.22 in inventory. Plant and property are also around $0.22 per share. So the present market cap is around book, if we take management's word on valuing inventory and plant.

A couple questions for you:

OPLC has two classes of shares, A and B, with about equal numbers of each issued. A shares have 1 vote each, and B shares have 10 votes each. Which is OPLK buying from Furakawa?

More generally, why does OPLK want to buy OPLC? Do they have technology, customers, or what that OPLK wants? It's sure not cash flow or good management.

[Sniper]

Hi Aviva,

What's OPLC? (Did you mean OCPI?)

Assuming that, From an early press report... "Oplink said the acquisition is expected to broaden its portfolio of offerings and significantly expand its addressable market." There was also something about shifting manufacturing to China.

[Scorpion Man]

[ QUOTE ]
Interesting. Just to be more precise about the numbers, in their most recent 10Q they report cash and marketable securities around $1.05 per share, and $0.22 in inventory. Plant and property are also around $0.22 per share. So the present market cap is around book, if we take management's word on valuing inventory and plant.

A couple questions for you:

OPLC has two classes of shares, A and B, with about equal numbers of each issued. A shares have 1 vote each, and B shares have 10 votes each. Which is OPLK buying from Furakawa?

More generally, why does OPLK want to buy OPLC? Do they have technology, customers, or what that OPLK wants? It's sure not cash flow or good management.

[/ QUOTE ]

Thanks for the reply. I think the $20-25m piece of real estate is well underestimated at book. That is what gets market cap below a true book. I think plant may also be underestimated (it does not depreciate as fast as book depreciation).

OPLK is buying the super voting class from Furakawa...but the supervotes do NOT follow the shares. So they will end up with 58% of the vote.

OPLK is a passive component maker...OCPI is an entre into actives. They also have some different major customers. The industry specifics are not my strength at all and I don't really care much other than to know that OPLK is serious about the deal and has been trying to buy someone for a long time. There are not that many choices (BKHM is the other obvious choice).

OPLK thinks they can run the company much better (just look at their results). For example one of the reasons results have been so bad is a recent acquisition that is losing money. They would just sell it, I assume. I also assume they would jettison the board and top management, saving significant dollars in the meantime.

[Sniper]

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I assume board can easily extend the 30 day poison pill.

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Do you have any reason to believe that they would do this?

Based on what has been stated, it sounds like their intent was to buy some time to think this thru, and bring in consultants to evaluate the offer.

Is there any reason to believe that there might be any other suiters?


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this deal will not be done at 1.50. I will lay you odds on real money. it is more likey not to be done at all.

[/ QUOTE ]

Have you spoken to anyone at Furukawa? Isn't the Furukawa piece essentially a done deal?

Have you seen the court papers?


Finally, is the Woodland Hills property on the market yet? Did you visit the site, and do you have a feel for who might be looking to buy that property?

[Scorpion Man]

If you want to research the deal, read the 4/23 8K filed by OPLK that has the contract they signed with Furakawa. No, I have not spoken to anyone at Furakawa as that would be a waste of time.

Furakawa won't be able to easily break this deal and noone is going to bid for the rest of OCPI once OPLK owns the Furakawa stake. Anyways, it does not matter because that is simply a big upside case and it takes care of itself.

Of course the board might decide to extend the pill..boards do all sorts of things to keep control, 30 days is very little time, and they have already demonstrated a willingness to use the tactic. The language around why they did the posion pill is totally standard and means little, except that they did not say "NFW", which is good. I don't think the 30th day is necessarily an important date, but we will see.

They said they are in the process of putting Woodland Hills on and I have not visited the site. WHo buys it and whether its worth $18, $22, or $27m is totally irrelevant to the story.


Sniper -- I appreciate asking questions, as my intent with this thread was to get a live, interesting idea out there. One of the more important things to learn in investing is what's important. Some of the things you are pointing out are irrelevant to the investment decision here.. i would NEVER NEVER NEVER visit the real estate. Unless I happened to have a preexisting relationship at Furakawa, calling a Japanese company and asking them about this deal would be totally fruitless.

Trying to predict the board's action specifically around the pill is also pretty much impossible IMO.

The key is to understand the motivations of those involved and the tactics available to them. For me, the setup here is kind reraising a tight player in a full ring who thinks you're tight too and neither one of you ever makes moves and he comes over the top again but seems like he actually wants a call and you have QQ. You are beat like 80-90% of the time. I call it pattern recognition and I believe it's the most important skill in investing. I can obviously be wrong, but I believe the odds are strongly in my favor on this trade.

I am a little surprised I have not had any other questions...not sure if its because nobody thinks its an intersting idea or because people do not know what to ask...

[Scorpion Man]

from the 8k -- it will be pretty difficult for Furakawa to back out of their part of the deal without being sued. In addition, OPLK has the ability to vote Furakawa's shares ahead of time, as I read it.

Section 6.5 Agreement to Vote Shares
(a) At every meeting of the shareholders of the Company called, and at every adjournment or postponement thereof, and on every
action or approval by written consent of the shareholders of Company, Seller (in Seller’s capacity as such), to the extent not voted by the
person(s) appointed under the Proxy (as defined below), shall, or shall cause the holder of record on any applicable record date to, vote the
Shares:
(i) against approval of any proposal made in opposition to, or in competition with, consummation of any of the Transactions;
and
(ii) against any of the following actions (other than those actions that are in furtherance of the Transactions and any other
transactions contemplated by this Agreement): (A) any merger, consolidation, business combination, sale of assets, reorganization or
recapitalization of the Company or any material subsidiary of the Company with any party, (B) any sale, lease or transfer of any significant
part of the assets of the Company or of the assets of any subsidiary of the Company that are material to the Company, (C) any
reorganization, recapitalization, dissolution, liquidation or winding up of the Company or any material subsidiary of the Company, (D) any
material change in the capitalization of the Company or any material subsidiary of the Company, or the corporate structure of the Company
or any material subsidiary of the Company, or (E) any other action that is intended, or would reasonably be expected to, materially impede,
interfere with, delay, postpone or adversely affect the Transactions or any other transactions contemplated by the this Agreement.

[Newt_Buggs]

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not sure if its because nobody thinks its an intersting idea or because people do not know what to ask

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I've been following the thread throughout the morning and reading up on the company and the deal but I just haven't have anything worthwhile to contribute yet. I'm proably not alone.